Reliance on decision which is sub-judice wouldn’t make assessment order erroneous

Merely because the decision of the High Court followed by Ao was sub-judice before the Supreme Court it would not make the assessment order erroneous.

In a recent case, the ITAT Mumbai has held that merely because the decision of the High Court was sub-judice before the Hon’ble Supreme Court it would not make the assessment order erroneous simply because the AO has followed the decision of the High Court.

ABCAUS Case Law Citation:
4811 (2025) (10) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT by assuming jurisdiction u/s 263 in holding that the assessment order framed u/s 143(3) of the Act is erroneous inasmuch as it is prejudicial to the interest of the revenue. 

The return was selected for scrutiny assessment and after thoroughly scrutinizing the return and considering the relevant documentary evidence submitted during the course of scrutiny assessment proceedings, the assessment was framed vide order u/s 143(3) of the Act.

Later, CIT assuming jurisdiction under the provisions of Section 263 of the Act, Pr. CIT issued a show cause notice on the issue of allowability of expenses related to ESOP. The PCIT was of the view that AO ought to have disallowed Employees Share based Payment under section 37(1) of the Act.

The Tribunal observed that during the assessment proceedings, the AO has sought details of employees share based payments with details note and justification of allowability these expenses as business expenses with documentary evidence. The assessee had filed a detailed reply and stated that the expense in question was incurred to secure consistent efforts from the employees by motivating and retaining them and not to increase the share capital of group company. Hence, it is a revenue expenditure incurred wholly and exclusively for the purpose of the business. It was further submitted that the company had amortised the cost recharge on a straight-line basis in the profit and loss account during the vesting period as per the Guidance Note of the Institute of Chartered Accountant of India (ICAI) and the guidelines issued by the Securities and Exchange Board of India (‘SEBI Guidelines).

The Tribunal observed that the appellant company had placed reliance on the various decisions of ITATs and High Courts wherein it had been held that cost recharge reimbursed to foreign company for shares of foreign listed to employees of Indian affiliates is a tax-deductible expenditure for Indian affliates, as this expenditure incurred is for retaining, motivating and rewarding employees which is akin to salary costs.

The Tribunal further noted that additionally, the company had also placed reliance on the Hon’ble Karnataka High Court decision wherein the High Court had affirmed the decision of Bangalore Tribunal ruling held that – discount on the issue of employee share-based payments i.e., difference between the grant price and the market price on the shares as on the date of grant of options is an expenditure allowable as a deduction under Section 37 of the Act; and discount on issue of employee share-based payments is not a contingent liability but is an ascertained liability.

The Tribunal noted that the PCIT had not invoked provisions of Section 263 of the Act suo moto but was compelled by the audit objections and was simply carried away with the audit objections raised by the audit party. 

The Tribunal observed that due to plethora of decision on the issue of ESOP expenditure, the AO had taken the most plausible view and it cannot be said that the view taken by the AO is erroneous. Merely because the decision of the Hon’ble Karnataka High Court was sub-judice before the Hon’ble Supreme Court would not make the assessment order erroneous simply because the AO followed the decision of the Hon’ble Karnataka High Court.

Accordingly, the Tribunal set aside the revisionary order and allowed the appeal of the assessee.

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